Ukrainian coal mines set to be privatised

A law adopted by the Ukrainian Government in 2012, intended to modernize the country’s unprofitable coal sector, will be used to privatise 45 coal mines.

Among the mines designated for privatisation are those held by state owned company’s Makeevugol, Ordzhonikidzeugol, Luganskugol, Pervomayskugol, Donbassantratsit, Lvivvugillia and Volynugol.

In April 2012, the government passed a law that allows for the privatisation of the coal sector, opening up profitable state-owned facilities to private investors, through licenses and leases or outright sales in an effort to save money, while boosting production.

Privatisation of Ukraine’s coal mines began in 2002/3. Government mines continue to supply state owned power plants with coal.

Increased coal targets

Ukraine’s current energy strategy outlines a need to increase coal production by up to 115 million t. Ministers in the government hope to achieve this target by modernising the coal mines, using private capital to do so.

70% of Ukrainian coal mines are state owned, with 80% of these unprofitable, requiring subsidies of up to US$ 160 million/year to keep them operational. Coal reserves in Ukraine total 117.5 billion t, with the country self-sufficient in supplies of thermal coal, while needing to import metallurgical coal.

The Ukrainian mining sector lost a reported total of US$ 1 billion in the first seven months of 2013, an increase of almost 35% from a year previously.

Guaranteed protection for mine workers

The 2012 privatisation law requires any buyers to provide social protection for miners at coal mines they might acquire.

Victor Turmanov, a Ukrainian member of parliament, and chief member of the coal industry worker’s union, said in a statement that bids for mining assets would be accompanied by the creation of working groups that would bring trade unions together.

“"In 2012, we adopted the law governing the privatisation of coal mines, which clearly stipulated that in the event of a sale the buyer should ensure continued, stable growth in wages for miners and maintaining benefits," Turmanov said.

Companies close to Ukrainian president benefit

The former Soviet state has claimed any privatisation of state assets will be carried out in “a transparent and competitive way.”

However, questions have been raised over previous privatisation auctions. Since President Viktor Yanukovich’s election in 2010, many of the auctions have been won by his campaign’s main financial backers, industrialists Rinat Akhmetov and Dmytro Firtash.

VTB capital suggested that “examples of privatisation in Ukraine suggest that conditions are not always met in a way that maximises the benefit of the state.”

Illegal coal mines

The country has also suffered from illegal coal mining activities. An estimated 6.5 million tpa is produced each year without official government licenses. These mines do not pay tax, nor do they have any reason to ensure workers’ rights are met. They therefore operate at much lower expense than coal mines owned by the state, and flood the domestic market with far cheaper coal.

The effect of these coal mines has been damaging to state owned coal mines, with profits further impacted and their prices undercut by the cheaper, illegally mined, coal.

Energy analysts give warning

The difficulty facing the proposed privatisation of Ukraine’s coal mines will be finding investors for the mines, according to energy analysts.

Domestic coal demand in Ukraine is weak, and production falling. Ukraine’s coal extraction totals fell by 4.3%, roughly 1.27 million t, between January and April 2013.

Elsewhere in the world, global coal prices are dropping as environmental regulations restrict coal use and an oversupply of coal prevents coal prices from recovering.

Denis Sakwa, analyst at Ukrainian investment bank, Dragon Capital, said that it order to find investors, and encourage people to purchase stakes in the coal facilities, the operating costs of these Ukrainian coal mines must first be brought down.

Sakwa noted that at the state-owned Lisichanskuglya mine, which was put up for sale in August, “the cost of production of coal is US$ 85/t, while at similar mines [not controlled by the Ukrainian state] it is in the range of US$ 50 – 60/t.”

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